Whenever I see someone ask how to calculate how big a mortgage he can afford, the answer almost always comes back as a percentage of gross income.

Why use gross income as the baseline? Why not net income?


You can choose to pay your mortgage instead of another bill, or vice versa. Your net will change from month to month while your gross is relatively static.

I can make a bunch of promises to my load officer about my expenses, but it is very difficult to verify. Moreover, it is pretty hard to give your net income and plan for emergencies.

So for the sake of reliability, verifiability, and general ease a lender will look at your gross.

YOU should definitely look at your net when deciding if you can afford a loan.


The percentage of gross income is a quick and easy way to arrive at the rough ballpark figure of the mortgage one can afford.

The net income is something which one does not know offhand.

If you want to seriously evaluate then most of the standard mortgage calculators will ask you to enter your gross income, your other liabilities like Auto Loan, Student Loan, personal Loan, Card Payments, Any other regular payments like Child Support etc.

After factoring all these one arrives at the actual mortgage one can afford.

As is evident, the above requires a good amount of calculation and hence the preffered method becomes on the basis of gross income.

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    "The net income is something which one does not know offhand." Unfortunate, but true. – kajaco Oct 7 '10 at 16:03

People typically present themselves to be as wealthy as possible to banks and as poor as possible to the government at tax time.

Gross income is really the most reliable number for most folks. Your and your employer are required by law to report an accurate gross income figure annually. Anything else is totally situational.

All they are doing anyway is computing your total debt-to-income ratio and mortgage-to-income ratio. The government agencies that buy mortgages, the big bank that buys the mortgage or the self-underwriting bank has differing standards for different products.


I would ignore the bank completely when they use gross income. Decide, based upon your current living situation, what your MAX limit on a monthly payment is. Then from that determine the size and cost of the house you can buy. My husband and I decided on a $2000 monthly payment max, but also agreed $1500 was more reasonable. When using those numbers in the calculators it is way less than when using gross income. When we used our gross pay the calculators all said we could afford double what we were looking for. Since they don't know what our take home pay is (after all the deductions including 401k, healthcare, etc), the estimates on gross income are way higher than what we can comfortably afford.

Set a budget based on your current living situation and what you want your future to look like. Do you want to scrimp and coupon clip or would you rather live comfortably in a smaller home? Do the online calculators based on take home pay and on gross pay to get a sense of the range you could be looking at.

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    Welcome to Personal Finance & Money! Please check out the Help Center for some useful resources, such as the guide to writing great answers. One good tip there reminds folks to answer the question being asked -- in this case that would be why sources of affordability recommendations use gross income. This guideline is especially apropos when answering old questions that already have accepted answers. – dg99 Nov 13 '14 at 21:40

Gross income is used because there are a lot of variables inherent in the calculation of a "net income", including a lot of things under your direct control that you could use to game the system.

"Net Income", as others have inferred, is a very flexible term. For the average individual, the definition that would most easily come to mind is likely post-deduction, post-tax earnings; "take-home pay". It sounds reasonable, too, as the amount you take home each month can be easily demonstrated with your two most recent pay stubs (which you need to bring in anyway to verify gross earnings). However, even that simplistic definition is fraught with possibility. You have the ability to modify your pre-tax deductions, such as for retirement or healthcare, and that in turn affects your taxes and thus your net take-home pay. To assume that you won't do that is foolish for the loan officer.

Other definitions of "net income", such as, in the case of shopping for a house, "disposable income plus current rent", are the result of even longer lists of deductions from gross pay. Many are also dependent on your current home; your electric bill is a function of the size, location and construction of your current home, all of which will change as soon as you move in. Your other bills, such as telecom (TV/phone/internet) are also more or less location-dependent, as even within a single city or metro area, your choice of services and service providers is dictated by the home's physical location. You may have to pay through the nose right now because your current home isn't serviced by anyone's fiber-optic network, while the home you're moving into could be in a hotly-contested area with access to multiple fiber-optic trunks.

So, to simplify all this, mortgage companies simply ask for gross income, then apply a metric that makes relatively conservative assumptions about your spending habits to arrive at a final amount. The upside is simplicity, the downside being that two people both making $60,000/yr may have two completely different financial pictures behind that single number.


Cynical answer:

Real Estate agents make money on commission from sale of houses, so their compensation is tied to the home price.

Banks make money off loans, so it is in their interest to make larger loans (as long as the loan gets paid). So their is a tension at the bank between selling a larger mortgage, and ensuring that their customer can pay the mortgage.

Gross income is easier to check, and the taxes at a given income are fairly predictable. And banks realized that people can change their medical and retirement deductions.


As a former consumer credit counselor, who worked with struggling homeowners and first time homebuyers I would argue that it is a mistake for lenders to rely on gross income and assumptions on what an applicant spends their income on. I think lenders do this because they believe it is efficient and may not understand the long term ramifications for the stakeholders, e.g. the borrower, the lender, the servicer, the investor, the broker, the taxpayer, the marshall, the foreclosure lawyers etc. Or lenders do know the impact of a superficial mortgage screening, and intentionally want to enrich themselves in the short term while harming other stakeholders in the long term.

Developing a budget that reflects what a person can realistically spend on their mortgage takes much longer than signing up for a Rocket mortgage. I would say an hour minimum for the first appointment to get a baseline, and at least two follow up appointments to make adustments soon after or whenever a borrower's financial situation changes dramatically. Credit counselors factor in all of the factors mentioned above, i.e. take home pay, future pay vs current pay, the ability to adjust deductions, seasonal expenses, multiple sources of income and their frequency, debt load etc. Budgets are always fluctuating, but when it is done right by a qualified professional the result is a much more accurate financial picture.

The consequences for not doing this type of old-school due diligence, or for willfully choosing to skip it, are varied. First off, mortgages will be given to homeowners who should never have qualified in the first place, and likewise denied to homeowners who should qualify. This will result in market distortion and this distortion was a primary contributor to the 2008 subprime mortgage crisis and the wave of foreclosures that came with it. Another consequence is the stripping of wealth from minority communities since they are often targeted by the most unscrupulous of lenders. Additionally, the securitization of mortgages based on poor diligence at the loan officer level means loan portfolio ratings are questionable, investors will lose money, and small banks who are heavily invested will fail as they did in the past. Depending on the federal enforcement of Dodd Frank Act, the taxpayers may or may not have to pick up the bill from a bailout of a big mortgage bank that was "too big to fail," via higher taxes, lost jobs, lost homes, and other negative externalities that were not accounted for by the loan officer, or willfully ignored.

Lastly, borrowers also have a responsibility to provide accurate financial information, which they don't always do. Unfortunately, in a capitalistic society where property is commoditized instead of communal, there is always mistrust, competition, the fear that you will be left behind, or the desire to get ahead. This could incentivize cheating by either the, borrower, the broker/lender, or both in this example e.g. no-doc negative amatorizing loans. This is just one of many other negative externalities. So the only true fix would be a switch to communal land ownership. In the interim, I would push for universal borrower access to low cost consumer credit counselors and a change in loan officer training and incentive structure.

  • I think the value of this answer could be improved if it was more directed at the personal transaction level, rather than the macro-economic level of the consequences of looking at gross vs net income. – Grade 'Eh' Bacon Dec 1 '16 at 15:49
  • You were going so well until "in a capitalistic society where property is commoditized instead of communal, there is always mistrust". – RonJohn Jun 11 '19 at 19:41

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